S&P: do what we want and no one gets hurt
May 4, 2011 — In 1993, as the newly inaugurated Clinton Administration worried that rising interest rates could hamper the President’s plan to stimulate the economy, Clinton adviser James Carville famously quipped: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
Carville was expressing his frustration at those who, through their purchase and holding of U.S. Treasury bonds, wield — or are treated as wielding — substantial power to shape domestic public policy. In today’s political and economic climate, several economists and social scientists are expressing similar frustration. Their concerns were amplified when the credit rating agency Standard and Poor’s revised its outlook on U.S. government debt to negative from stable, a move that both S&P and many members of Congress used as ammunition to support calls for further cuts in government spending.
If the primary question being asked by policy makers is “how well are we reassuring markets” and not “how well are we serving the interests of our citizens,” or if those policy makers believe that the answer to the first question provides a satisfactory proxy to answer the second question, these observers wonder whether political decision making in the U.S. can fairly be characterized as “democratic” at all.
In its report, S&P wrote: "The [more pessimistic] outlook reflects our view of the increased risk that the political negotiations over when and how to address both the medium- and long-term fiscal challenges will persist until at least after national elections in 2012."
For the next several days, officials rushed to make statements and appearances designed to satisfy bondholders that the deficit would be cut.
Treasury Secretary Timothy Geithner appeared on several television networks to reassure investors that Democrats and Republicans were close to a deal on the deficit. Members of Congress, from Charles Schumer to Paul Ryan, issued similar statements of their own.
This is hardly new. Officials have been explicitly trying to reassure bondholders since the government enacted a $787 billion stimulus package in order to limit the damage of the financial crisis of 2008. In May 2009, an official in the Obama Administration told Reuters anonymously: “Our deficit is going to increase sharply as a result of these measures, but once the recovery is fully, firmly established and the risks have dissipated we’re going to walk back these measures and the deficit will decrease,” adding that the U.S. is “attuned to the interests of our investors…and if the deficit issue comes up we’re fully prepared to discuss it.”
The official was speaking while Geithner was in China, on a mission to reassure the Chinese government that its holdings of U.S. debt were safe despite the stimulus package.
The impulse to reassure the bond market is said to be rooted in a fear that, if investors are displeased with public policy made by officials, they might pull their money out of the Treasury bond market. If enough of them did so, the argument runs, the U.S. would face a serious problem in financing its operations and paying the interest on its current debt.
There is substantial debate over whether investors would actually pull money out of the Treasury bond market (see sidebar).
Will They Flee?
Jamie Galbraith, an economist at the University of Texas at Austin, said that there was little chance that investors would flee from U.S. bonds, which for the foreseeable future will remain the safest place to invest, regardless of the deficit level.
L. Randall Wray, an economist at the University of Missouri at Kansas-City, agreed, adding that because the U.S. prints its own currency, there is no chance it will default on its debt.
“The people who argue that we need to cut the deficit because of the bond market either don’t understand that or they don’t want people to understand that,” he said.
In that sense, Wray said, officials may be using the bond market as a way to stoke unfounded fears about the deficit in order to justify other agendas, like cutting social programs.
Whether those concerns are well-founded or not, said Arthur MacEwan, an economist at the University of Massachusetts, Boston, the focus on the perceived will of investors should raise red flags for citizens who are concerned about whose interests the government takes into account.
“The bond market is a formal way in which people with wealth can make their opinions about public policy known,” MacEwan said. But since voters have no direct control over the bond market, he went on, when elected officials prioritize those opinions over the desires and needs of voters, “you end up with a fundamentally undemocratic situation.”
Greg McAvoy, a political scientist at the University of North Carolina at Greensboro, wrote a paper in 1997 called “The Bond Market as a ‘New Institution’ in Macroeconomic Policy-Making,” in which he argued that the bond market has become increasingly influential since the 1980s and that “the encroachment of the bond market into policy-making has broad political implications, including the potential to alter quite significantly the preferences of policy-makers.”
McAvoy said that, while the bond market serves a vital economic function — serving as the mechanism through which the government can finance itself through borrowing — allowing the market to have too much influence over policy decisions “raises serious questions about the autonomy of democratic institutions to choose and pursue economic outcomes.”
One dollar, one vote
“What we normally think of when we think of democracy is the principle of one person, one vote,” MacEwan said. “So, we tend to think a lot about elections.”
But, MacEwan went on, while elections are a way of holding policy-makers accountable for their actions, a more accurate description of democracy is a system of governance in which the interests and well-being of the public at large trumps any and all competing interests.
Ha-Joon Chang, an economist at the University of Cambridge, agreed. “What democracy is for is to take care of everyone,” he said, “not just the financial markets.”
If the bond market can influence public policy to a point in which the perceived desires of bondholders can trump the perceived needs of voters, Chang said, that situation raises a troubling question: Who is serving whom?
Chang added that when private actors, who make their opinions known through consumption and lending, have more influence on officials than voters do, democracy becomes perverted: “To put it bluntly, you have a system in which it is not one person, one vote, but one dollar, one vote,” he said.